Abstract

Monetary Balance-of-Payments Theory

Just like traditional balance-of-payments theory, the monetary balance-ofpayments theory seeks to answer the question as to the causes of the balanceof- payments situation and the question of balance-of-payments adjustment mechanisms. Instead of starting out from the various accounts (current and capital account), the monetary balance-of-payments theory takes the overall balance-of-payments (balance of foreign exchange) as its point of departure. It is not national economic policy that governs, at least in part, national product growth, price level and interest rate level, with these magnitudes in their turn governing the balance-of-payments situation, but, where direct international price and interest rate relationships prevail, these magnitudes are determined exogenously. It is rather the situation on the national money market (and hence also national monetary policy) which is the primary and direct determinant of the balance-of-payments situation. After all, high national product growth, high price-level increase rates and a low interest rate level do not lead, as deduced by traditional balance-of-payments theories, to balance-of-payments deficits, but on the contrary to balance-of-payments surpluses. These differences, which at first sight are astonishing, are explained tentatively in a presentation of monetary balance-of-payments theory. In a critical appraisal, the theoretical results o£ monetary balance-of-payments theory and the results of attempts to test them empirically are compared with the rival, traditional balance-of-payments theory.